NeuroMetrix, Inc.

Good morning and welcome to the Neurometrics first quarter 2021 earnings call. My name is Debra and I will be your moderator on the call. On this call, the company may make statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature that depend upon or refer to future events or conditions are forward-looking statements. Any forward-looking statements reflect current views of neurometrics about future results of operations and other forward-looking information. You should not rely on forward-looking statements because actual results may differ materially and as a result of a number of important factors including those set forth in the earnings release issued earlier today. Please refer to the risk and uncertainties, including the factors described under the heading Risk Factors in the company's periodic filings with the SEC, available on the company's Investor Relations website at neurometrics.com and on the SEC's website at sec.gov. Neurometrics does not intend and undertakes no duty to update the information disclosed on this conference call. I'd now like to introduce the Neurometrics Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins, please go ahead.

Thank you, Deborah, and those attending today's earnings call. Dr. Shai Ghazani, Neurometrics President and CEO, is participating in this Q1 2021 review. Neurometrics is a leader in proprietary non-invasive medical devices for the diagnosis and treatment of pain and neurological disorders. We design and deploy a recurring revenue business model in all of our products. These commercial products include the neurodiagnostic technologies of DPN Check and Advance, plus our primary chronic pain technology, Quell. Our Q1 2021 earnings release demonstrated continued progress for profitability combined with modest net cash usage. Among the relevant details from the Q1 results, Q1 revenue was 2.2 million. This represented 19% sequential growth from the fourth quarter of 2020 and approximately flat revenue with Q1 of 2020. Our sense is there continues to be some delay, albeit diminishing, and our customer base returning to its pre-pandemic diagnostic testing levels. DPNcheck was the lead revenue generator. Domestic Medicare Advantage sales were up both sequentially and year-to-year. International sales, primarily Japan, lagged Q1 of last year. Advanced sales were also up sequentially and year-on-year. This reflected higher volume levels as well as improved pricing. Quali continued to deliver a positive operating margin. Our gross profit on revenue was $1.6 million. The margin rate was 73.3% versus 71.4% in Q1 of last year, an improvement of 190 basis points from the year earlier result. Operating expenses total $1.6 million. Spending in Q1 2021 was reduced by $570,000 or 26% from Q1 of last year. R&D expenses benefited from a one-time credit of $450,000 upon the resolution of a technology license. OPEX also reflected a charge of $187,000 to write off the remaining right to use asset under the company's lease on its Waltham, Massachusetts facility. This facility was idled in 2019 and offered for sublet. However, current market conditions make it unlikely that a sublet will be secured during the remaining lease term, which is about a year. Net loss for the quarter was approximately $60,000, which compared favorably with a net loss of $657,000 in Q1 of last year. And on a per share basis, the net loss was two cents a share versus 45 cents last year. Regarding balance sheet, we ended the quarter with $5.1 million in cash, and net cash usage during the quarter totaled $81,000. The company's cash resources are sufficient to fund its operations well into Q2 of next year and likely beyond. Stockholders' equity at the end of the quarter was $5.2 million or $1.39 per share. The company's capital structure remains debt-free and there were 3.8 million common shares outstanding. Dr. Ghazani will now address our overall strategy. Thank you, Tom.

Our current business strategy is guided by three core principles. The first is continued R&D investment in our established DPN check and quality technology platforms to drive the respective market penetration and to open up additional markets. Second is to continue transitioning the business to operating profitability and cash generation. And the third is establishing a consistent and predictable top line growth. I'll take this opportunity to provide brief updates on each of these elements. First, focusing on R&D. Our R&D strategy is to develop unique proprietary medical devices that utilize noninvasive neurostimulation to diagnose and treat pain and neurological disorders. We always seek to define new product categories or leapfrog existing technology. We develop products using our in-house 10-person R&D team. We have two near-term R&D projects along with several nascent programs. First on DPNcheck, we are in the late stages of our second-generation DPNcheck project. Our current expectation is to launch in the U.S. before the end of the year. This version of DPNcheck captures our experience with a first-generation device collected over 3 million patient tests. We believe that the new DPNcheck will solidify our first-mover advantage and make it highly challenging for future competition to emerge, and it will also protect our growing high-margin aftermarket consumables revenue stream. The new device includes a number of features that will position us to grow both the domestic and international businesses. Some examples include improved usability features, wireless communication with reporting software, and multiple language support. Our next program is in the disease state of fibromyalgia. We are developing a prescription treatment for the symptoms and functional impairment associated with fibromyalgia based on QUAL technology. Fibromyalgia is a common chronic pain disorder that affects 2% to 6% of the adult population and is more common in women than men. Although there are several FDA-approved drugs, including pregabalin and duloxetine, they have side effects and poor adherence. The global fibromyalgia treatment market size is several billion dollars, with the U.S. being a large slice of that. A recently completed, double-blinded, randomized sham-controlled trial using Quell produced encouraging results with evidence of several important treatment benefits compared to sham, particularly in certain well-defined patient subgroups. We anticipate scientific presentations at pain medicine conferences later this year, and a couple of manuscripts will soon be submitted to peer-reviewed medical journals. We are finalizing our regulatory strategy and anticipate a filing in early 2022. with commercialization to commence by the end of 2022. And we will provide updates as this program continues to develop. Our next program, which is at an earlier stage, is for Chemotherapy-Induced Peripheral Neuropathy, or CIPN. We are monitoring a NIH-funded, multicenter, double-blinded randomized sham control trial of Quell in CIPN that is being managed by the University of Rochester. We believe that this study could read out in the first half of next year, at which time we will evaluate whether to proceed with a CIPN indication for QUEL based on the study findings. CIPN is a common type of neuropathic pain that affects many of the 650,000 people who receive chemotherapy each year. An encouraging pilot study of QUEL for CIPN that was published several years ago by the University of Rochester team was encouraging, and so we are hopeful that this ongoing RCT We'll build on those earlier findings. Our next element is profitability. We have communicated for the past two years that we are prioritizing attainment of profitability in cash generation. As covered by Tom in his discussion of the financials, the first quarter of 2021 provided evidence of our progress. Assuming that our business continues to develop as we anticipate, we expect to show continued progress towards profitability this year and should be in position to cross over in 2022. However, we do caution. We are still grappling with uncertainty in terms of how rapidly our DPN check business will grow, regulatory timelines for our investigational quell device for fibromyalgia, and continued uncertainty around COVID-19. So we will provide updates as we learn more. Moreover, due to the long sales cycles in our DPN check Medicare Advantage business and the choppiness of the DPN check international business, The path to profitability may not always proceed linearly. And the third element is growth. We believe that we can steadily grow revenues while remaining steadfast in our commitment to achieving profitability. We see growth coming from a number of sources. In the near term, we are bullish about our DPN check business, particularly the domestic market. DPN check is now well established in Medicare Advantage. We have a good pipeline of insurance companies and other entities in the Medicare Advantage space that are candidates to implement DPN Check this year. Moreover, the Medicare Advantage space itself is growing at nearly 10% annually, and our largest customers are actively acquiring physician practice groups, which often leads to new DPN Check business soon after the acquisition closes. We are also looking for ways to restart our OTC QWEL business, which is focused on lower extremity pain. To this end, we expect to launch several initiatives later this year, one of which is a novel feature that we believe will generate interest among individuals with chronic knee pain. A bit further out, we see the Quell business returning to strong growth with the launch of a fibromyalgia indication in 2022. So in summary, Neurometrics has novel products that are targeting large markets with unmet needs. We are committed, an operationally efficient organization that is structured to attain profitability while supporting growth. Those are our prepared comments. We'd be happy to take questions at this point.

If you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We'll pause for a moment to compile the Q&A roster. Your first question comes from Bill Church with TGR Capital.

Good morning. Thanks for taking my call. I saw earlier this year that both of you are taking all or some of your salary in stock, and I applaud your support of the company and what you're doing for the shareholders. My comment, question, the Tennis Channel, they usually have commercials for Tylenol and then Cymbalta, talking about the fibromyalgia, I can't pronounce the name, and then with a whole long list of side effects. and being a longtime tennis player and older and arthritic and all that sort of thing. I know a lot of my friends have pain and arthritis and all that sort of thing. And there are a couple people on the tour that have arthritis too. And so I think we all look forward to see if Quell can help be one of the solutions for what we're experiencing and keep us going on the court. And so that's all I have. Thank you.

Thank you, Bill.

And your next question comes from the line of Jared Cohen. with J.M. Cohen and Company.

Yeah, a few questions. One, can you give us just as a percentage of revenue, the breakdown between DPM and 12?

So, Jared, this is Tom. We decided not to lay out each product line revenue and profitability. but certainly DPN check is the dominant part of the revenue chain. And QWEL, as we said, we operate at a much lower level than in the past, but we ensure that it's operating profitability as we look to reposition that product going forward.

Okay. Second, I know All right, then in the quill line, how much is revenue coming from reusables, you know, electrodes or so forth?

Let me just – it's running in the range of about 60%. Okay. Reusables. Okay. Okay.

And then my last question, because I, you know, was wondering in terms of new revenue opportunities for QUEL also, besides the ones you've mentioned. I know it's for chronic pain, but what about more less chronic and sort of on the acute side? I'll give you an example, something like for people that – recent back surgery, who it seems it doesn't work initially as well and have to go through rehab, who have pain right after the back surgery and are trying to, you know, alleviate it somehow, and particularly at night, you know, who don't sleep and so forth. Are there opportunities for prescriptions from doctors and so forth for the use of the quails? I'll give you a perfect example. Something like my mother-in-law who had fusion surgery and still is having, she had that two months ago and is having problems with pain and so forth. And was initially on opiates and of course you can't use those forever.

That's a good question, Jared. We believe that Quell's Qual technology strength lies in chronic conditions based on its design, wearability, the fact that it can be used for prolonged periods of time, both within a day as well as over a long period. So our focus really is on chronic conditions.

Right. But I would say more, yeah, for months or so forth or even years, but right.

Yeah, so we're focused on, in principle, it could have utility in more acute settings, but our focus, and again, I think where the strength of the technology lies is in chronic conditions, and so we're focused on, of course, lower extremity chronic pain, which is what it's currently available for over the counter, and then from the investigational side, we're working on, as I mentioned, of course, fibromyalgia, which we have very good clinical data on, and then chemotherapy-induced peripheral neuropathic pain, and then some additional chronic conditions potentially after that as well.

Oh, no, I just was just curious, because I always tried to convince my mother, well, not to do the back surgery, just use the Quell, and she was more absolute. And I actually bought it for her, and she just used it for a day, and, you know, and She gave it back to me, and it turns out the backstory wasn't as great as she thought it was.

Yeah. So that's why I was just curious. All right, thank you very much.

Thank you, Jared.

Your next question comes from Ken Marish with EBT.

Thanks for taking my call. Hey, question around the consumables. If consumable revenue is about 60% and that's great, what is the company doing to drive greater persistence with the product and therefore greater consumable revenue over time?

Are you referring to specifically the Quell business?

The Quell business in particular, yes.

Well, we have a number of different programs in place. We have features in the mobile app that supports the project that try to drive engagement and retention of users. So there's a number of things that we're doing on an ongoing basis. But as I said, most of our R&D focus at this point is on these specific disease-specific applications such as fibromyalgia that we're pursuing. We believe that in those specific instances we'll be able to drive even better long-term engagement.

Got it. Thank you.

And your next question comes from the line of Bill Church with TGR Capital.

Thanks. I'm just following up on Jared's question of An experience I've seen from a couple people coming back from ACL surgery using the Coel for a period of 6 to 10 or 12 weeks during rehab, and both of them said that they thought that the Coel really helped them get through kind of this pain as they were going through rehab, which can be kind of painful. And then after their rehab was over and they were sort of pain-free, they kind of dropped it. One of them now seems to have arthritis in her knee, and she's about to start using it again. But I'm wondering, sort of getting back to Jared's about with the mother-in-law, you know, use it one day. I mean, I know it's not like Advil or something like that, but do you see in your studies that over longer use, let's say a week or two weeks or something, it tends to build up some comfort or relief from the pain?

Bill, we don't have specific clinical studies that address that question. We've done a lot of work looking at the real-world data that we have through the Qual Health Cloud. The majority of Qual users link up their devices via the app to our cloud server. So we have published some work on that. And we do We do think that it has a sort of aggregating benefit over several weeks and historically our sense has been that it takes two to three weeks, at least for most chronic conditions, chronic pain conditions for it to start to take effect. But we really don't have a lot of experience on the acute side for me to comment on. It is an interesting application. It's something that we may revisit in the future. But at this point, we have to be fairly narrowly focused. So we've chosen these kind of large chronic conditions such as fibromyalgia to put our energy into at this point. Sure. Okay. Thank you.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. There are no questions in queue. I would like to turn the call back over to Mr. Higgins for closing remarks.

Well, this is shy, but I would like to thank you for joining us on the call today, and we look forward to keeping you updated over the balance of the year.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.